OPEC likely to extend output cuts into next year

Orlando Vargas
|
26 May, 2017, 10:08

Oil rose on Tuesday as expectations of an extension to OPEC-led supply cuts supported prices, reversing losses earlier in the session after a White House proposal suggested selling off half the country's huge oil stockpile.

Thursday marks the first meeting of the year for Opec in Vienna, Austria.

The goal of OPEC's production cuts is to reduce the glut of excess inventory on the market, and achieve a level of price stability somewhere above $50 a barrel.

Naeem Aslam, chief market analyst at ThinkMarkets, said the markets had pretty much priced the extension in but whether all members are willing to play along for another nine months is anything but certain and that is what investors will be focusing on.

Iraq'sOil Minister Jabbar Al-Luaibi said almost all countries participating in the cut had agreed to extend it, though there was no consensus yet on how long the extension should be.

Releasing reserves would add supplies to already high and rising USA production C-OUT-T-EIA of 9.3 million bpd, not far off levels of top suppliers Saudi Arabia and Russian Federation.

As such, OPEC no longer holds the power to control oil prices but what the group can do is create a shift in the term structure of oil, which will create a backwardation scenario where spot prices above forward prices.

The price of a barrel of Azeri Light crude oil increased $0.47 to stand at $54.72 on the world markets.

The Organization of Petroleum Exporting Countries and 11 non-members agreed a year ago to cut output by as much as 1.8 million barrels a day.

The deal, lasting for six months, is due to expire on June 30.

Asked whether deeper cuts were being considered, Marzouq said: "No".

Some analyst question whether the US will be legally able to sell more of its crude reserves due to a stipulation by the International Energy Agency that obligates its members to hold at least 90 days worth of supply in strategic reserve.

Iraq's oil minister promised to meet the nation's full commitment in May, Saudi Minister Al-Falih said in an interview on Arabiya television on Tuesday.

"OPEC were saying they want to bring down inventories and it hasn't happened yet which is why we expect an extension", said Giovanni Staunovo, analyst at UBS.

Before, OPEC's strategy was to keep pumping at full tilt in order to push the oil price lower and make life hard for the Americans, who need a higher price to make money. More U.S. oil hitting the market, even if staggered over time, would just add more barrels to an already overloaded market, potentially making life tougher for big oil producers.

Market analysts say although Kuwait's proposal of a 12-month extension or a deepening of cuts was not the market's base-case scenario, a rolling over of cuts could cause oil prices to rise dramatically in the short-term.

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